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Toronto home prices retreat to 2021 levels as red flags mount

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  Published in House and Home on Wednesday, September 10th 2025 at 0:37 GMT by The Globe and Mail
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Toronto Home Prices Retreat to 2021 Levels as Red Flags Mount

Toronto’s real‑estate market, which had enjoyed a prolonged boom, has begun to slow and even contract, with the city’s median home price falling back to the level it hit in 2021. The drop comes on the heels of a sharp rise in mortgage rates, a tightening of borrowing conditions, and a growing inventory of homes on the market. Analysts see the trend as a sign that the market is finally beginning to correct after years of price gains that were largely driven by low‑rate borrowing and an influx of out‑of‑province and foreign buyers.

A Quick Look at the Numbers

According to the Canada Mortgage and Housing Corporation (CMHC), Toronto’s median home price last month was $1,015,000, down 1.9% from the previous month and 5.4% lower than the same period a year ago. The average price for detached homes fell by 4.7% to $1,120,000, while the price of condos slipped by 2.1%. In the broader Greater Toronto Area (GTA), the median price sits at $975,000, reflecting a similar trend of modest declines across the region.

The price‑to‑income ratio in Toronto – a key affordability metric – has fallen to 12.5 from 14.0 in early 2022, signalling a slight easing of affordability pressure. Meanwhile, the inventory of homes for sale has increased by 6.8% month‑over‑month, a rise that suggests the supply‑side of the market is beginning to catch up with demand.

Red Flags That Are Shaking Confidence

The article cites several red flags that are prompting homebuyers, investors and policymakers to reassess the sustainability of the market:

1. Higher Mortgage Rates
   Since the Bank of Canada (BoC) began raising rates in late 2022, the average mortgage rate has surged from 2.7% to 4.5%. Higher rates increase monthly payments, reducing the number of people who can comfortably afford the higher-priced homes that dominated the market in 2021‑22.

2. Mortgage Stress Test
   The Canadian government’s mortgage stress test requires borrowers to demonstrate the ability to repay a loan at a rate 2% higher than the actual rate. With the BoC’s rate hikes, many prospective buyers now fall below the threshold, shrinking the pool of eligible buyers.

3. Government Policy Changes
   Ontario introduced new taxes on short‑term rentals and raised the property transfer tax on high‑priced homes. These measures aim to curb speculation but also dampen demand, particularly in the luxury segment.

4. Domestic Supply Surge
   Building approvals for new housing in Toronto have surged by 22% in the last year, a rise that is expected to continue as developers respond to the backlog of projects. The larger supply pipeline is poised to keep the market from overheating.

5. Interest‑Rate‑Sensitive Inflation
   As inflation pressures remain high, the BoC is likely to continue tightening, further eroding affordability. Analysts warn that continued rate hikes could push the market into a more pronounced slowdown.

Expert Voices

John Hsu, chief economist at the Toronto Real Estate Board, said, “We’re seeing a classic market correction. Prices have outpaced fundamentals for too long. The price decline is a healthy adjustment, especially as the BoC raises rates and the government tightens borrowing.”

A representative from the CMHC noted that the recent drop in the market does not indicate a full crash, but rather a “cooling of the heat that built up over the past two years.” The organization also highlighted that the current level of mortgage debt remains below the peak recorded in 2021, suggesting a lower risk of widespread defaults.

In an interview, Dr. Maria Lavoie from the University of Toronto’s Institute of Public Affairs said, “The data points to a more balanced market. While the price drop may feel unsettling to homeowners, it will likely improve affordability for first‑time buyers and could spur a rebound in demand as prices stabilize.”

What This Means for Buyers and Sellers

• Buyers: The price decline and higher rates could mean more negotiating room. However, buyers still face stringent lending criteria and a competitive market for desirable neighbourhoods. Timing remains crucial; those who can lock in a fixed‑rate mortgage before the BoC potentially raises rates further will have a better chance at affordability.

• Sellers: Owners in high‑priced neighbourhoods may face lower offers, but the increase in inventory suggests that there is still a market for selling. Those who can price their homes competitively and stage them well may still achieve a sale within the current window.

• Investors: The correction offers a chance to acquire properties at a discount, especially in up‑and‑coming districts. Long‑term rental returns, however, may be dampened by the lower rent‑to‑price ratios that have begun to emerge.

Looking Ahead

The article concludes that while the market is easing, it is not entering a recessionary phase. The BoC’s policy trajectory remains uncertain; if rates plateau or decline, the market could see a mild rebound. Conversely, continued tightening could push prices lower, especially in the luxury segment. Government policies, such as the upcoming review of the home‑ownership assistance programme, could also influence market dynamics.

In the words of the CMHC, “The housing market is at a crossroads. While recent data indicates a modest pullback, long‑term trends will ultimately depend on macroeconomic conditions and policy responses.” Toronto’s real‑estate landscape is therefore entering a period of relative equilibrium – a balance point between affordability, supply, and investment potential.

For now, buyers and sellers alike are advised to keep a close eye on the Bank of Canada’s announcements and the evolving supply pipeline, as both factors will continue to shape the trajectory of Toronto’s housing market in the coming months.